The governments of the Western industrialized world have provided over $4.6 trillion (in constant 2007 dollars) to the world’s less-developed countries (LDCs) over the past 50 years, the equivalent of several Marshall Plans. Some of this has been extremely useful, but aid to advance economic development has not worked well
Economist Peter Bauer pointed out some of the reasons for this some years ago, including the fact that foreign aid tends to end up under the control of the elites in developing countries. A related reason is the fact that aid to LDC governments makes it possible for them to postpone necessary reforms. The leaders of a recipient country may know that they should free up trade, facilitate new business formation, streamline licensing procedures, and improve protection of private property. But if there’s enough donor money to keep things going, these steps can be postponed.
Haiti and Ethiopia are prime illustrations. No one produces mangos on much of Haiti’s good mango soil in large part because no one has clear and enforceable title to the land on which they can be grown. Ethiopia is so bad about granting land title to its own farmers (and agricultural productivity is so poor as a result) that the government is now issuing 99-year leases to foreign companies to come in and farm Ethiopia’s excellent soil.
Even when a benefactor like the World Bank imposes conditions that favor freer markets, those conditions seldom touch policy issues like land titles, and the flow of donor funds makes all such changes less urgent; reforms can be postponed indefinitely.
Donor funds also often work against economic development by causing government bloating at the expense of the private sector. When the government takes over much of the health or communications sectors, for example, private entrepreneurs are barred from those opportunities. Further, governments are often not very good at these functions, and cronyism is likely to creep in. Members of the chief minister’s own tribe or extended family are likely to get hired for those choice positions. Corruption is not uncommon. All of which exacerbate the initial inefficiency.
Democracy may be impeded as well. A government that depends more on foreign aid for its operating budget than on taxes paid by its own citizens becomes answerable, not to its own citizens but to the donor governments. Thus, when donor funds are flowing, the citizen-taxpayers often get short shrift. And barriers to free and responsive government are often barriers to economic freedom–and development–as well.
Foreign aid is best applied through private channels, for short-term emergencies, and/or for causes that are politically popular almost everywhere, like immunization. Propping up the finances of developing countries’ governments is likely to do more harm than good.